Responsible investment, from soil to trunk

More than 200 people gathered in London for our Responsible Investment Forum last week, including for a panel on responsible agricultural and forestry investment. Here are three takeaways that get to the root of the issue.

With the majority of new agri and forestry investments likely to be in developing countries and more institutional investors adapting emerging market strategies, demonstrating that you are a responsible investor and manager is essential.

Here’s a round-up of some of the best advice we heard, along with some suggestions of what still needs to be done.

Agriculture needs forestry-style certification

Forestry and farming are now widely accepted as essential to a climate change solution, thanks to COP21, but more ways of measuring the economic benefits of sustainability are needed.

“Where I am less confident that the legal framework will drive good forestry practices, I need certification,” said GMO Renewable Resources’ Eva Gregor, adding that agriculture lagged behind timber in these assurances.

“We want to build soil on the ground but there isn’t a nice certification organisation that will look at the broad range of farming we do. We are having to build those metrics internally,” she said.

In timberland, Forestry Stewardship Council is considered the best by the WWF, though there are others available.

The parameters of certification help managers work out how best to run plantations sustainably, and responsible timber buyers will insist on it.

Fellow panellist Scott Thompson from Impax Asset Management said that organic regulations have divided the market into “organic and not organic” at an environmental cost. Many haven’t considered blending sustainable practices from organic farming into conventional operations.

Land titles must be carefully considered during due diligence

Land titles, as institutional investors have learned, in some cases through media scrutiny, can present high risks, and avoiding conflicts of interest in land rights is complex.

“A huge part of our due diligence process to understand what the landscape of each investment should look like. It requires a lot of specialists, land tenure studies and making the determination of whether you can get free prior informed consent [a FSC requirement],” said MaryKate Bullen, talking about her firm New Forests’ work with indigenous communities.

That level of due diligence is expensive but essential to long-term success: “Due diligence … gives you a high-level view and you have to be confident that you can follow that through.”

Providing metrics to your LPs builds trust

“I had a conversation … with an LP who was asking me what we could be doing together to make forestry investment more responsible. That’s a very proactive stance,” said Bullen.

LPs’ attitude to responsible investment varies, but development finance institutions have lead the way, asking exhaustive questions, even down to details on individual forest managers, said the panel.

Bullen said about two-thirds of LPs she deals with check sustainability thoroughly. That’s positive, but the check-box approach often taken poses its own challenges:

“We have to start with a lot of basic education. Investors can get hung up on check-the-box metrics, when you are dealing with a complex biological system,” said Gregor. She said one teak investment in the Queensland cyclone belt had been converted back to farmland because the plantation was literally being blown away. The form she filled in gave room for a yes/no answer on whether the firm had ever converted forest to other uses.

“Sometimes the answer is not yes or no – but a need for some flexibility on the ground.”

What are the best ways to invest responsibly? Let me know: clare.p@peimedia.com